Changes In Policy Variables Research Articles

China’s Monetary Policy Impacts on Money and Stock Markets

This study investigated the impact of China’s monetary policy on both the money market and stock markets, assuming that non-policy variables would not respond contemporaneously to changes in policy variables. Monetary policy adjustments are swiftly observed in money markets and gradually extend to the stock market. The study examined the effects of monetary policy shocks using three primary instruments: interest rate policy, reserve requirement ratio, and open market operations. Monthly data from 2007 to 2013 were analyzed using vector error correction (VEC) models. The findings suggest a likely presence of long-lasting and stable relationships among monetary policy, the money market, and stock markets. This research holds practical implications for Chinese policymakers, particularly in managing the challenges associated with fluctuation risks linked to high foreign exchange reserves, aiming to achieve autonomy in monetary policy and formulate effective monetary strategies to stimulate economic growth.

Effects of Tariff Reductions under the Domestic Support Programs: The Case of the Korean Rice Market

This study examines the effects of tariff reduction under the domestic support program in the Korean rice market as the non-tariff quantitative restrictions on rice import have been replaced with ordinary tariff measures. A brief conceptual analysis with graphical treatment and a market model for the direct payments program are first provided. Then, an empirical examination is conducted within a partial equilibrium framework to determine the tariff reduction effects, the role of policy variables such as target price in protecting the rice industry and their relationship with threshold prices. Results show that the direct payments program plays an important role in protecting the Korean rice industry even when import tariffs are sharply reduced. Changes in policy variables have direct effects on the threshold prices. The target price change in particular has significant effects that minimize the negative impacts on the rice market from tariff reduction. Moreover, the results suggest that the current direct payments program should be maintained in future agricultural policy reform, and increases in its policy variables need to be positively considered.

What measures Chinese monetary policy?

This paper models the PBC's operating procedures in a two-stage vector autoregression framework. We decompose changes in policy variables into exogenous and endogenous components in order to find a “clean” monetary policy indicator whose changes are mainly policy induced. Our main findings are twofold. First, the PBC's operating procedures have evolved over time; since about 2006, they have developed to a relatively stable regime. Second, its operating procedures are neither pure interest rate targeting nor pure reserves targeting, but a mixture. A set of indicators all contain information about the policy stance. Finally, we construct a new composite indicator of the overall policy stance.

What Measures Chinese Monetary Policy?

This paper models the PBC’s operating procedures in a two-stage vector autoregression framework. We decompose changes in policy variables into exogenous and endogenous components in order to find a “clean” monetary policy indicator whose changes are mainly policy induced. Our main findings are twofold. First, the PBC’s procedures appear to have changed over time. Second, its operating procedures are neither pure interest rate targeting nor pure reserves targeting, but a mixture of the two. There are a variety of indicators that appear to contain information about the monetary policy stance. It is therefore preferable to use a composite measure to gauge the stance of Chinese monetary policy. We construct a new composite indicator of the overall policy stance, consistent with our model. A comparison with existing indicators suggests that the composite indices, rather than individual indicators, perform better in measuring the stance of Chinese monetary policy.

Gender, Time Use and Models of the Household

The aim of this paper is to explain why time use data are essential for analyzing issues of gender equity and the intra-household allocation of resources, comparing living standards, and estimating the behavioral effects of changes in policy variables. The first step in the exposition is to show that the neglect of these data in much of the literature on household behavior, in both developed and developing economies, can be traced to unrealistic assumptions on domestic production and the mistaken idea that non-market time can be viewed as leisure. It is argued that an approach is required that makes explicit the need for data on the time family members spend on domestic work as well as on labor supply. An approach of this kind is outlined and used to identify the specialized assumptions that are employed when they are missing. The paper also discusses the limitations of available time use survey datasets that are due to deficiencies in survey design. The more serious and common problems are illustrated using as case studies the Statistics South Africa 2000 Time Use Survey and the time use module included in the Nicaraguan 1998 Living Standards Measurements Survey.

How does monetary policy transmission mechanism work in Fiji?

The study aims to examine the impact of changes in policy variables namely, monetary aggregate (M1), exchange rate and interest rate on two monetary goal variables, namely output and price level in Fiji from 1970 to 2006 by applying the procedures of variance decomposition and impulse response functions. We conclude that the money channel is the most effective channel of transmission mechanism among the three channels.

Consumption and macroeconomic policies

PurposeThe paper aims to examine asymmetry in the cyclical behavior of private consumption in a sample of nine developing countries in the Middle East.Design/methodology/approachThe empirical model includes three policy variables: government spending, the money supply, and the exchange rate. Anticipated movements in these variables are likely to vary with agents' forecasts of macroeconomic fundamentals and, therefore, determine planned consumption. Unanticipated policy changes, in contrast, determine cyclical consumption.FindingsThe results indicate that fluctuations in private consumption are mostly cyclical. The stabilizing function of policy shocks varies across countries and appears to be asymmetric within countries.Originality/valueAsymmetry necessitates a thorough evaluation of the positive and negative effects attributed to changes in policy variables and the necessary reforms to relax binding constraints.

Has Latin America's post-reform growth been disappointing?

After years of poor macroeconomic performance, many Latin American countries undertook ambitious programs of macroeconomic stabilization and structural reform during recent years. The change in policy created high expectations for the region. Some observers question, however, whether actual growth outcomes in several Latin American countries have measured up to such expectations. This paper offers some evidence that the response of economic growth to reforms in Latin America has not been disappointing. Because of the significant changes in policies achieved in Latin America by the 1990s and in spite of the global slowdown, Latin America did well to return to its historic rate of growth of 2 percent per capita in 1991–93. Latin American growth has responded to changes in policy variables as would have been predicted by the experience of other times and places, as summarized by a panel regression spanning a large number of countries and multi-year periods from 1960 to 1993. In order to obtain consistent estimates of the parameters linking policy variables and growth, this paper uses a dynamic panel methodology that both controls for unobserved time- and country-specific effects and accounts for the likely joint endogeneity of the explanatory variables.

Testing Predicted Choices Against Observations in Probabilistic Discrete-Choice Models

Probabilistic discrete-choice models, such as multinomial logit models, are widely used to predict changes in market shares or total demand resulting from changes in policy variables under management control. These models often are evaluated in terms of their ability to predict choices in a holdout sample. This paper presents a new test for comparing predicted and observed choices. The results of a Monte Carlo experiment indicate that the new test has good finite-sample properties and high power in several circumstances likely to arise frequently in applications.

Seasonality in large-scale macroeconometric models

Macroeconomic indicators are typically appraised in seasonally adjusted form, and forecasts are often presented in a similar way (as annual changes, for example). Moreover, the quarterly macroeconomic models used in forecasting are commonly estimated from seasonally adjusted data. Nevertheless, these models can generate forecasts with seasonal patterns, and this paper assesses the cause and cure of this phenomenon. It is found that forecast seasonality is induced by seasonality in the various inputs: exogenous variables, residual adjustments, the dynamic specification of certain equations, and annual changes in policy variables. Series changing annually but observed quarterly are termed ‘intercalated series’, and are simple examples of periodic processes. Forecast seasonality can be removed by appropriate adjustment of all these inputs. Models containing explicit future expectations variables solved in a model-consistent manner are also considered: numerical sensitivity to the terminal quarter may result from terminal conditions that require adjustment when seasonality is present.

The First Labour Market Decision: Leaving School in Australia

Abstract Determinants of the decision to stay at school or to enter the youth labour market are analysed. It is shown that the commonly used participation rates for both youth labour market and secondary school analysis are flawed. Consequently secondary school retention rates are estimated as aggregate measures of that first decision. Australian data for 1968 to 1983 are utilized. A wide variety of factors appear to affect retention rates including inter-state institutional differences, youth unemployment rates, demographic cohort structures, credentialism at grade 10 and the availability of apprenticeships, but wages only to a much lesser degree. Nevertheless, strong unexplained time trends appear, as do very strong differences between males and females and different years of age. Major implications of the complex relationships found are that simple marginal changes in policy variables, such as scholarship levels, are unlikely to be effective.

A modified procedure for simulation of macroeconometric models

The rational expectations literature suggests that even the effects of unanticipated changes in policy variables may not be accurately described by conventionalsimulations of macroeconometric models. Beginning with Zellner and Palm's time-series approach to structural econometric modelling, a modified simulation procedure is developed to examine the effects of changes in policy variables which are consistent with historic time-series processes. A state-space representation and the Akaike Information Criterion are used to model exogenous variable processes, and results from modified and conventional simulations are compared.

The determinants of international creditworthiness and their policy implications

The present paper utilizes an empirical measure of creditworthiness based on bankers' perceptions to estimate the effect of various variables hypothesized to influence assessments of countries' debt-servicing capacity. The data pertain to a cross section of countries within the period 1979–1983. Such estimates necessarily employ a ceteris paribus assumption, which prevents a realistic assessment of the effects generated by policy changes. The second part of the paper develops, therefore, a dynamic simulation model of a hypothetical average economy. The simulations allow analysis of changes in macroeconomic variables and creditworthiness over time within a system that maintains accounting identities and behavioral constraints. Several changes in policy variables are considered that highlight the importance of export expansion. The latter is, of course, an often suggested policy objective, but the present paper demonstrates its effectiveness in terms of a somewhat nonstandard criterion.

Money, Output, Rational Expectations and Neutrality: Some Econometric Results for the UK

A substantial body of theoretical literature associated with the new classical school of macroeconomics demonstrates that, if real variables, such as output and employment, deviate from their market-clearing, natural, rates only because of random exogenous shocks or unanticipated changes in policy variables, such as the money stock (i.e. if structural neutrality (SN) holds), and if economic agents form their expectations according to the rational expectations hypothesis (REH) (see Muth, 1961), then economic policy will be ineffective (see for example Lucas, 1972, 1973, 1975; Sargent and Wallace, 1975, 1976; and Sargent, 1979). This policy ineffectiveness hypothesis has recently been the subject of intensive econometric investigation, which began with the seminal empirical studies on the effectiveness of monetary policy in the United States by Barro (1977, 1978). Barro's studies, and those of Barro and Rush (1980), again for the United States, Wogin (1980), for Canada, and Attfield, Demery and Duck (1981a, b) for the UK, all support the hypothesis that money is neutral. All these studies have in common the feature that they test for the joint hypothesis of structural neutrality and rational expectations (RESN). In contrast to these studies, Leiderman (1980) has shown that, within the framework of the type of model that has been used to test for the effectiveness of monetary policy, the separate hypotheses of RE and RESN are uniquely nested within the general structure of these models, and therefore that the nested hypothesis testing methodology, discussed by Mizon (1977a, b), may usefully be adopted to gain more information about the validity of the constituent hypotheses of RE and SN. Leiderman found that, in an extended version of Barro's (1977) model of money growth and unemployment, the hypotheses of RE and SN could not be rejected separately or jointly. This finding was taken by Leiderman as confirming the new classical hypothesis that monetary policy is neutral. The purpose of this paper is to report the findings of an empirical study for the United Kingdom similar to that undertaken by Leiderman for the United States. Our findings for the UK are at variance with those of Leiderman for the USA, and also with those of Attfield et al. (1981a, b) on the validity of the joint hypothesis of RESN for the UK. We reject the view that monetary policy can have no effect on real output in the short run. The paper is organized as follows. In Section I we present the model, or maintained hypothesis, against which the restrictions, implied by RE and SN, are tested. Section II contains a report of the empirical tests of the new classical policy ineffectiveness hypothesis and its component hypotheses. Some concluding comments are given in Section III.

Policy-Dependent Parameters in the Presence of Optimal Learning: An Application of Kalman Filtering to the Fair and Sargent Supply-Side Equations

Lucas' criticism was an important step in the development of rational expectations and the ensuing debate over policy-effectiveness. In a macro framework, where the main interest is on the effect of monetary policy on output, the Lucas criticism implies that changes in policy feedback rules will result in systematic changes in estimated models.' (See, for example, Barro (1977, 1978).) Kydland and Prescott (1977) and Calvo (1978) pointed out another implication of rational expectations for policy-making; if policy-makers are following a rule at time t, they may find it optimal to switch to another rule at some future time t + T, T > 0. Of course, a certain amount of parameter variability may be found in all econometric models. However, if the main source of parameter variability in the model is the lack of a learning mechanism about the behavior of the policy-maker, then the incorporation of a continuously-adjusting policy expectations mechanism would reduce parameter variation. Thus, if the rational expectations specification is the proper way to specify models, one may expect relatively less parameter variability in those models which make use of policy anticipations than those models which do not.2 This paper attempts to address the issues of parameter variability and parameter policy dependence by an analysis of two supply-side equations. One equation is from the Fair model, which does not incorporate rational expectations, and the other is from the Sargent model, which does. The parameter variability and parameter policy-dependence of these two equations are explored in three ways. First, the timevarying estimates in the Fair and Sargent supply-side equations are obtained with the Kalman filter algorithm, and the parameter variations of the two equations are compared. Second, Sargent's model is estimated with two different policy expectations mechanisms-one in which the expectation rule remains fixed during the sample period, and the other in which the expectation rule is allowed to adjust as new information becomes available. These estimates are compared to see if variation is reduced when expectations adjust at each time period. Finally, since the estimates themselves form well-defined stochastic processes, a series of Granger causality tests is presented to show if the variations in these estimated parameters are indeed caused' by changes in policy variables.

Social experiments in economics

Economists have long faced the problem of how to measure the effect of changes in policy variables on the behavior of economic units. A variety of techniques have been used for this purpose in the past, including econometric models, simulation models of artificial populations, surveys of past behavior, and surveys with questions about behavior under hypothetical conditions. Each of these methods yields some approximation to the actual effects, how much is not clear, especially on a micro basis, since the true response remains unobservable. That it might be possible to measure these effects directly by the use of controlled experiments, as is so frequently done in fields such as biology and agriculture, seemed too far-fetched to merit serious consideration. Social experimentation does, however, just that. It seeks to measure the effects of changes in policy variables by applying these changes to human populations under conditions of controlled experimentation similar to that used in the physical and biological sciences. However, while controlled experiments in the physical sciences are usually designed to test the validity of an existing or proposed theory, social experiments are mainly employed to measure key effects of new or potential social programs. Theory still plays a key role, particularly in the economic experiments, as the conceptual framework for the measurement of the effects. A necessary condition for a social experiment is agreement on one or more policy objectives that are expected to lend themselves to being transformed into implementable programs. Ideally, experimentation should help formulate a program or to evaluate a proposed program. With this objective in mind,

SHORT RUN DETERMINANTS OF COMMERCIAL BANK INVESTMENT PORTFOLIOS: AN EMPIRICAL ANALYSIS

UNTIL RECENTLY, discussion of monetary policy has focused on the overall reaction of the banking system to changes in policy variables originated by the central bank. Relatively little attention has been given to the complex factors that govern an individual bank's response to changes in monetary policy. Thus, while theories of financial behavior are implicitly formulated in terms of individual decision-making units, the attention of monetary research has been directed towards the behavior of aggregates. With the possible exception of a recent study by Bryan and Carleton [1], the testing of banking theory has generally been conducted in terms of aggregate demand and supply functions for money [2, 12]. Although the use of aggregate data in empirical research is valid, there comes a stage in the empirical analysis where some more information on the behavior of individual units is needed. This study departs from the general trend in that it concentrates on the behavior of the individual bank. Its purpose is to obtain empirical estimates of the parameters of a simple model of banks' asset choice. The model focuses attention on short run changes in the composition of the investment portfolio. Specifically it is argued that the demand for liquid assets is a function of asset size, interest rates and deposit instability. Our purpose is to estimate the sensitivity of liquid asset changes in bank portfolio to changes in these exogenous variables.